Canadian banks feel the stress
Unlike the U.S., all banks in Canada must pass stress tests, regardless of their size.
The stress tests expose banks to “exceptional but plausible” circumstances. The conditions of the test help to identify risk. For instance, the stress test will see how a bank performs during economic slumps.
“Canada's a paragon of safe banking,” said Labrèche.
He points to the banking crisis of 2008 and the pandemic as massive financial downturns that the Canadian banking system was able to not only withstand, but stay strong throughout.
“Banks are well managed, well regulated, well diversified and well capitalized,” said Ciappara.
Each of these elements plays a role in ensuring that Canadian banks are less likely to fail, meaning that your money is safer when deposited in a Canadian bank.
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Canadian banks are well managed
Having a well-managed bank ensures that the daily operations — everything from loans to deposits — are safe and secure. Ciappara points to the nation’s mortgage delinquency rates to demonstrate a key difference between the U.S. and Canada.
Mortgage delinquency happens when a homeowner is at least 30 days behind on a mortgage payment. According to the CBA, the mortgage delinquency rate was 0.15% nationally in 2022, compared to 1.77% in Q4 in the U.S. In the U.S. the rate reached a high of 11.50% following the Great Recession of 2008 to 2009. In Canada, we only reached 0.45% in that same time period.
Canadian real estate debt totals $2,267.8 billion; which is still a lot of cash to lend out. However, the fact that there is such a low delinquency rate demonstrates how effective our banks are at managing that debt.
This ability to identify risk is one factor that keeps cash flow healthier, meaning the banks are in better financial health and are less likely to fail. Canada also has a more unified approach for insuring the money you deposit.
Canadian banks are well insured
When you deposit your money in a Canadian bank, you can rest assured that it’ll be there when you go to take it out.
That’s because the Canada Deposit Insurance Corporation (CDIC) will insure up to $100,000 per account, per institution.
The CDIC is a Crown corporation that provides insurance for bank deposits, and protects account holders in the event of a bank failure.
You could have $100,000 deposited in an account under your name at one bank, and another $100,000 deposited at another. Both deposits would be insured by the CDIC. Even if the bank should fail, your money would still be available to you.
Ciappara points out that there are different categories that CDIC insurance applies to and each has $100,000 of coverage. The insured categories are:
- Deposits held in your name (e.g. chequing account)
- Deposits held in the name of two or more people (e.g. joint accounts)
- Deposits held in trust. (Up to $100,000 per beneficiary named in a trust)
- Deposits held in a registered retirement savings plan (RRSP)
- Deposits held in a Registered Education Savings Plan (RESP)
- Deposits held in a registered retirement income fund (RRIF)
- Deposits held in a tax-free savings account (TFSA)
- Deposits held in a first home savings account (FHSA)
- Deposits held in a Registered Disability Savings Plan (RDSP)
Just like the banks diversify where their money is invested, you should follow the same process.
Spreading out your investments in a variety of funds minimizes the risk of any investments failing. And if you put your money in one of the areas protected by CDIC insurance, you have the added benefit of knowing that you have extra protection should a bank failure occur.
Canadian banks are well regulated
In Canada, the Office of the Superintendent of Financial Institutions (OSFI) ensures that banks are not likely to have massive failures.
While the OSFI is the single prudential regulatory office in Canada — that is, the office that supervises, regulates and monitors financial institutions — there are various regulators in the U.S.
Ciappara believes a single regulator ensures greater security, since there is “a clear line of communication between the regulator and the banking system.” Basically, there is a single third-party entity in place to ensure that the bank is operating with the best practices.
When you have one organization ensuring that everything is operating smoothly, you know that a certain standard is being met. When you have many regulators overseeing things, there’s no clear regulatory system, increasing the chances of failure. In Canada, there is less chance of any major upheavals that will affect your assets.
Canadian banks are well diversified
You might have noticed that the U.S. has more smaller, regional banks than we have in Canada.
The sheer number of smaller banks operating makes it more difficult to diversify their credit risk, revenues and funding.
As Ciappara points out, “as goes the economic fortunes of a town, so do the results of the bank.”
Having national banks ensures their strength isn’t tied to a single, regional economy. This means that even if one type of industry faces hardship, the wide range of customers and services will keep the establishment going.
Canadian banks are well capitalized
The next time you borrow money from your bank, know that you’re helping the security of our financial institutions.
Ciappara says that Canadian banks maintain strong capital, in part thanks to their ability to earn income on the loans they distribute. There is a healthy cash flow, which reduces the chance of failure.
In the case of Silicon Valley Bank, one cause of the failure was customers rushing to withdraw their funds. The ability to maintain strong capital ties into our banks being well diversified and demonstrating ”solid credit risk management practices.” At the end of the day, there’s less risk of you being affected by other account holders withdrawing their funds.
Steps to financial safety
While your money might be safe when it’s in the bank, you may still have concerns about how it’s handled.
Labrèche and Ciappara emphasize the importance of exercising safe practices when managing your money. One of the key parts of individual safety is being vigilant of scams.
In 2022 alone, the Canadian Anti-Fraud Centre reported crimes totalling $530 million in victim losses. The best first step in preventing yourself from falling victim to financial exploitation or fraud is education.
“In a connected world, and increasingly digital world,” said Labrèche, “I think everyone has a part to play.”
A March 2023 survey by Chartered Professional Accountants of Canada found that 18 to 34 year olds — an age group usually depicted as very digitally savvy — are increasingly at risk of scams. The demographic’s tendency to partake in online buying and selling can lead to more exposure to the most popular scams: credit card fraud and phishing.
Labrèche believes that educating yourself on the financial system, thinking critically, and learning how to judge legitimate and illegitimate requests for money are some of the best ways to avoid financial crime.
As a first step in improving your money literacy, make use of your local bank’s resources and staff to educate yourself.
“That's where ultimately financial literacy begins,” said Labrèche, “the interaction at the bank level.”
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